Once were dog shares: how to bark up the right trees

So when stocks shunned by the market rebound spectacularly, it’s only the gutsiest investors who share in the spoils.

Last year’s big winners were blue- chip stocks, far from the fringes of the radar screens for most equities managers. If earnings were steady and dividends were attractive, the shareholder was rewarded. Witness Commonwealth Bank of Australia (up 25 per cent), Telstra (up 34 per cent) and CSL (up 75 per cent).

Most fund managers expect these market leaders will hold their ground in 2013 as the earnings quality and high-yield themes endure.

But the clever contrarian call also paid off handsomely in 2012 and some of today’s dogs could be tomorrow’s darlings.

BlueScope Steel
shares have delivered a significant windfall. Pressured by a glut in global steel supply, the high dollar, inflated labour costs and a sharp downturn in domestic construction activity, BlueScope stock hit a record low $1.30 on July 26.

Since then, the stock has surged 135 per cent following the announcement of a 50:50 joint venture with Nippon Steel, for which BlueScope received $US540 million in proceeds. Shares in BlueScope closed at $3.50 on Friday.

Company Profile

Alumina
shares have been decimated as a dismal aluminium market crippled the company’s earnings, with added pressure on the domestic operations from the high dollar.

Add a significant debt burden to the balance sheet and whispers that a heavily discounted capital raising was on the cards and the stock crashed to a 20-year low of 64¢.

From there, Alumina rallied almost 70 per cent to close at $1.08 on Friday.

Bank of America Merrill Lynch analyst Stephen Gorenstein has a price target of $1.30 per share.

Fortescue Metals Group crashed to a three-year low of $2.97 in September as the iron ore price plunged below $US90 a tonne and the miner’s debt burden became an increasing concern. The stock has subsequently bounced 52 per cent.

Not everyone agrees deep value is the best approach for 2013.

“While some people are looking for turnarounds that can double in six months, we look for high-quality businesses," said Hyperion portfolio manager Joel Gray.

“High return on capital businesses often have high payout ratios, which ties into the yield theme. The fact is the market’s been rewarding yield recently, and I can’t see that changing any time soon."

“Our quality filter doesn’t let us own some stocks regardless of how cheap it is on a deep-value basis . . . CSL and Cochlear are not cheap, but they’re in the portfolio given the quality," she said.

“A lot of these beaten down stocks have good reasons for being beaten down."

Most investors preferred to get exposure to the rebound in commodities through the high-quality diversified end of the market, such as BHP Billiton and Rio Tinto, which rallied by about 15 per cent and 33 per cent respectively over the same period.

One unloved stock that the Aberdeen team has taken a shine to is
Newcrest Mining
, which has shed almost 30 per cent of its value in the past year following a series of production halts and technical issues. With a gold price of about $US1689 an ounce, the stock may have slid too far.

“They’ve had a few operational issues, but coming out of that a lot of operational risk is abating and capital expenditure has peaked. When I talk about value, the stock is fetching $US240 per ounce on a [enterprise value to] reserves basis, they’re diversified by mine with a disciplined management and robust balance sheet," Ms Lopez said.

In the media sector, embattled free-to-air operator
Ten Network
, is another stock some contrarians have tipped to rebound.